What bridges the alarmingly high trade gap with India

Nepal's trade deficit with India has grown at an alarmingly high rate of almost 100 percent in the last five years.

According to Nepal Rastra Bank (NRB), Nepal's trade deficit with India increased to Rs 435.79 billion in Fiscal Year 2014/15. Compared to the Rs 218.56 billion deficit in Fiscal Year 2010/11, this was a jump of whopping 99.39 percent.

Trade deficit with India -- Nepal's biggest trading partner -- alone accounts for two-third of Nepal's total trade deficit.

Nepal's total trade deficit in Fiscal Year 2014/15 stood at Rs 689.37 billion.

While other major fundamental macroeconomic indicators of the country are heading in the positive direction, the ballooning trade deficit with India has become one of the major setbacks for the government.

Despite the government's continuous efforts to bridge the trade gap -- through the formulation of a comprehensive trade policy, formation of the Trade and Export Promotion Center, simplification of the customs clearance process, and providing of incentives including cash, it has been increasing at an alarming rate.

According to Naindra Prasad Upadhayaya, secretary at the Minister of Commerce and Supplies (MoCS), the government has also been trying to remove non-tariff barriers that have helped fuel trade deficit.

The trade imbalance with its southern trading partner is surging so rapidly that the government's attempts at arresting the deficit have been a failure so far.

However, experts say that the structural problems have been the key reasons behind increasing trade deficit.

"Trade deficit is bound to increase when there is a huge imbalance between consumption and production in a country," Posh Raj Panday, the executive chairman of South Asia Watch on Trade, Economics and Environment (SAWTEE), says. "The government seems complacent with its comfortable foreign exchange reserves built largely on remittance. There have not been any substantial efforts from the government toward overcoming the structural problem," he adds.

INVESTMENT MUST FOR BOOSTING EXPORT

Experts say Nepal needs to attract foreign direct investment or multinational companies in manufacturing sector -- particularly from India -- to boost production and create 'an exportable surplus'. They cite success stories like Unilever Nepal Ltd, Dabur Nepal Ltd and Asian Paints Nepal -- which have been exporting products to India.

Packaged juice, which Dabur Nepal Ltd produces, was one of the 10 largest exports to India in Fiscal Year 2014/15. Central

Bank data reveals that packaged juice worth Rs 1.14 billion was exported to India in the last fiscal year, an increase of 6.2 percent from Fiscal Year 2013/14.

"The best way to boost production and exports is by attracting, promoting and encouraging investment from India," Pandey says. Neighboring Indian states like Uttar Pradesh, Bihar and West Bengal, which have population far higher than Nepal, are potential markets for Nepal.

However, there are pre-requisites for flow of foreign investment. The signing of the Bilateral Investment Promotion and Protection Agreement (BIPPA) with India was expected to encourage further Indian investment in Nepal.

However, improvement in the political situation -- which has remained volatile for some time now, uninterrupted power supply for industries, upgradation of the infrastructure sector -- including the roadway, and end of labor problems are also major conditions that would help attract foreign investment in Nepal.

SUBSTITUTION OF AGRO PRODUCT IMPORTS


Nepal's over-dependence on import of agro products is one of the major factors behind the ballooning trade deficit.

Nepal imported fruits, rice, and vegetable worth Rs 996.4 million, Rs 3.62 billion and Rs 1.8 billion respectively from India alone in Fiscal Year 2014/15, according to NRB.

Realizing that import substitution of agro-products was a key to bridge the trade deficit with India, the government is also carrying out various programs through cash crop and commercial farming promotions.

"Production of petroleum and machinery in Nepal, which are the biggest contributors to the trade deficit, is impossible in Nepal," according to a source at the Ministry of Commerce and Supplies.

Given the fact that Nepal pays a significant amount for agro product imports, we can boost production of agro production which can significantly reduce our trade deficit, he said, adding that the government policies and programs related to import substitution are yet to be fully implemented.

However, agro experts caution that framing programs and policies for import substitution of all agro products is an impractical idea.

"A large part of imports from India are cereal products and focusing on import subsidization for such agro production is an impractical idea as such products cannot compete with Indian products which are highly subsidized by the Indian government. So we have to focus on the exportable products like oranges, pears and coffee which have more competitive advantage," Bhairab Raj Kaini, former Director General of the Department of Agriculture, says.

FOCUS ON PRODUCTS WITH COMPETITIVE ADVANTAGE

In a bid to reduce trade deficit, the government seems to have shifted its focus in recent years to encourage production of commodities that have a competitive advantage in the domestic and export markets.

Cement is one such product that has emerged as a product not only with high possibility of finding an export market in India but also as an import substitute. The government has announced facilities for increasing cement production in Nepal.

"Considering the growing interest in the cement industry, a policy of bringing roads and electricity lines to the plant areas will be continued for their rapid promotion," Minister for Finance Ram Sharan Mahat said while presenting the budget for Fiscal Year 2015/16.

The government has also allocated Rs 630 million for the construction of access roads to mines for 16 cement plants and construction of electricity stations and transmission lines to the 12 cement plants.

There are also calls for emphasis on increasing production and processing of high-value commodities to reduce the trade deficit.

"High-value products can fetch more money even when exported in small quantities," trade analyst Purushottam Ojha says.

"High-value agricultural products, non-timber forest products -- particularly medicinal plants and herbs, selected manufacturing articles like cement, processed agro-products, pashmina, and handicraft, can be developed in order to enhance our supply-side capacity," he adds.

TRADE LOGISTICS EFFICIENCY

Complaining about obstacles in customs clearance and transit procedures, traders have long been calling for the streamlining and simplification of such processes.

Nepal has scored 2.59 points in the World Bank's 2014 Logistic Performance Index (LPI).

The index also reveals that there is still a lot of room for improvement in streamlining transit procedures and reducing cost of movement of goods between gateway ports and manufacturing units.

One of the persistent problems is the lack of quarantine and food-testing facilities for the export of agro products.

"The number of quarantine facilities and food-testing facilities at border points should be increased," reads a report titled 'An Assessment of Export Barriers of Nepalese Products to India', which was conducted by the Department of Economics at Patan Multiple Campus in June 2014 for NRB.

"It will reduce the number of days involved in the process of exporting the products," it added. "Kathmandu should talk about quarantine-related issues with New Delhi asking India to accept third-party certification and to allow a standards-related body of global repute for a commercial presence in Nepal."

Source: Republica